WASHINGTON (MarketWatch) -- A legal issue causing widespread angst among banks supervised by the new Consumer Financial Protection Bureau is triggering bipartisan concern on Capitol Hill, with lawmakers of both parties considering working together to blunt the chances of a behind the scenes show-down between the fledgling financial regulator and financial firms.

At issue is the 2010 Dodd-Frank financial law, which gave the CFPB broad authority to examine financial firms' books and records to ensure that firms are engaging in fair practices when it comes to credit cards, mortgages and other products. Bankers argue that Dodd-Frank has an error that leaves them with little protection when they turn over sensitive legal memos meant to be kept private.

A Republican-led House panel will consider the matter at a hearing Wednesday. But Democrats are also concerned. Rep. Carolyn Maloney (D., N.Y.), for instance, is co-sponsoring a broad bill that seeks to improve the examination process for banks and credit unions and adds privacy safeguards for privileged documents banks turn over to the consumer agency.

"While the CFPB's General Counsel has indicated that it plans to extend the privilege, I believe it should be codified to avoid any confusion the same way it is for other regulators," Maloney said in a statement Tuesday.

Absent a law change, banks are reluctant to hand over privileged information to the bureau. The examinations are confidential, and the consumer bureau declined to comment on whether any banks have refused to provide it privileged documents. But a number of banks are taking an adversarial posture, making clear that they don't believe they are protected, industry lobbyists say.

Banks fear that when they give the bureau private legal memos, they could be waiving traditional protections that keep those communications confidential. A waiver of attorney-client privilege could enable third parties, such as trial bar attorneys, to gain access to legal analysis that could be used against them in class-action lawsuits on a variety of banking issues from foreclosures to overdraft fees.

The Financial Services Regulatory Relief Act of 2006 makes clear that attorney-client privilege--a longstanding safeguard that enables lawyers to be frank with clients--isn't waived when banks provide documents to other banking agencies, such as the Federal Deposit Insurance Corp.

Lawmakers want to level out the law. Top Republicans on the panel, Reps. Spencer Bachus (R., Ala.) and Shelley Moore Capito (R., W.Va.), have asked the bureau to stop collecting privileged information from financial firms until Congress passes legislation addressing the problem.

Sen. Richard Shelby of Alabama, the Senate Banking Committee's top Republican, has introduced a bill aimed at ensuring banks have greater privacy protections.

Senate Banking Committee Chairman Tim Johnson (D., S.D.) "plans to work with Ranking Member Shelby to find a bipartisan way forward that ensures the CFPB is subject to the same privileged waiver protections as other bank regulators," said Johnson's spokesman, Sean Oblack.

The CFPB says it has "full and unfettered" access to information from the banks it supervises, and has warned that failure to provide requested information is a violation of law.

"Supervised institutions may not selectively withhold responsive documents based on their judgment that such materials are not necessary to the bureau's execution of its responsibilities or that other materials would be sufficient to suit the bureau's needs," wrote CFPB General Counsel Len Kennedy in a Jan. 4 bulletin.

The bureau added that it will treat all information obtained through its bank supervision process as "confidential and privileged."

Still, the bureau hasn't quashed concerns in the way legislation might.

"Eliminating any uncertainty over the CFPB's ability to protect privileged information in the same way as other federal banking agencies is very important," said American Bankers Association Chief Counsel Kenneth Clayton. "It helps regulators quickly access important supervisory information, limits the risk of frivolous litigation, and maintains the due process protections embodied throughout federal law."

CFPB Director Richard Cordray said he doesn't believe a legislative fix is necessary, but he would support one.

"We would support an amendment to correct what we believe was an oversight," Cordray said at a recent hearing.

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